link to page 1 
Updated January 4, 2021
Introduction to the U.S. Economy: GDP and Economic Growth
As a result of the Coronavirus Disease 2019 (COVID-19)
GDP can be measured in two different ways. The
pandemic, economic activity declined rapidly in the United
expenditures approach calculates GDP by summing all
States in early 2020 and remains below pre-pandemic
expenditures on goods and services by final users .
levels, despite gross domestic product growth being
Expenditures are divided into five categories: (1)
positive in the third quarter of 2020. The speed of the
consumption (expenditures by households), (2) investments
economic recovery and projections of longer-term growth
(largely expenditures by businesses), (3) government
are of concern to policymakers due to the connection
spending, (4) imports, and (5) exports. Because GDP is a
between the economy’s performance and the overall well-
measure of domestic production, this approach subtracts
being of Americans. This In Focus provides an introduction
imports from exports to arrive at net exports.
to the U.S. economy, including how economists measure its
performance and the factors that influence its long-run
Alternatively, GDP can be calculated through the income
trajectory.
approach in which GDP is calculated by summing all
income earned within the economy, including wages, rental
What Is Economic Activity?
income, interest income, and profits. Measurements of GDP
Economic activity includes any actions involved in the
produced through the expenditure approach and income
production, distribution, and consumption of goods and
approach are equivalent because the final market price of a
services.
good or service should reflect all of the incomes earned and
costs incurred throughout the production process.
Figure 1. Circular Flow of Resources
Potential GDP and Economic Performance
GDP is often used as a measure of economic health. One of
the ways in which economic performance is often measured
is by the output gap—the difference between real GDP and
potential GDP. Potential GDP is an estimate of the highest
sustainable level of output the economy can produce. When
actual output is above its potential, it can signal that the
economy is overheating (expanding at an unsustainable
rate). When actual output is below its potential, it can signal
less than full employment and potential recessionary
Source: Figure created by CRS.
conditions.
Notes: This is a simplified representation of the economy. Other
Economic Growth
sectors, including the government, financial sector, and imports and
exports, can also be represented as flows within the economy.
Growth in economic activity brings about benefits to
economic actors, and it is the predominant measure of
Economists generally view economic activity as a circular
changes in material living standards. In general, as GDP
flow of resources. As shown in Figure 1, businesses
grows, individuals’ incomes increase, as does the
purchase their factors of production—land, labor, and
production of goods and services; individuals not only have
capital—from households to produce goods and services.
access to more goods and services but also have income to
Households then use the income earned from businesses to
purchase those goods and services. However, GDP growth
purchase goods and services. Income that households
does not give any indication of how income growth is
choose to save remains in the circular flow of resources; it
distributed within the economy.
is distributed to businesses through the financial sector in
the form of loans rather than through consumption
In the near term, growth in economic activity is largely
spending.
governed by the business cycle, which shifts from
expansionary phases to contractionary phases (recessions)
Measures of Economic Activity
and to recoveries. Policymakers can use monetary and
The standard measure of economic activity is gross
fiscal policies to affect aggregate demand (i.e., total
domestic product (GDP), which is calculated in the United
spending) in an effort to diminish the volatility of changes
States by the Bureau of Economic Analysis (BEA). GDP is
in economic growth due to the business cycle. However,
defined as the total value of all final goods, services, and
these policies are unlikely to have large impacts on the
structures produced by a nation’s economy during a
long-term growth rate of the economy. For further
specified period—in other words, the total value of the
information on the business cycle, refer to CRS In Focus
economy’s output.
IF10411, Introduction to U.S. Economy: The Business
Cycle and Growth.
https://crsreports.congress.gov
link to page 2 
Introduction to the U.S. Economy: GDP and Economic Grow th
To affect the economy’s long-term growth rate, it is
size of the labor supply can increase the productive capacity
important to focus on the supply side of the economy
of the economy, potentially leading to economic growth.
instead of factors that impact demand within the economy.
In the long run, the rate of economic growth is largely
Technology
dependent on the economy’s ability to increase its
Technological improvements and efficiency gains allow
productive capacity over time.
individuals to use the different factors of production in a
more efficient manner, producing more or improved goods
Determinants of Long-Term Growth
with the same amount of resources. For example, the
The long-term growth rate is largely determined by the
discovery of chemical fertilizer increased the productive
amount of physical capital and human capital and the rate
capacity of agriculture. Economists tend to use technology
of technological change in the economy.
as a catch-all term for any changes that impact the
productivity of the economy. Changes in regulatory
Physical Capital
structure, trade policies, or patent laws, which may impact
Physical capital includes all the man-made resources
the productivity of the economy, are often discussed
workers use to produce goods and services, including tools,
alongside technological changes.
machinery, and other infrastructures. The current amount of
United States Economic Growth
physical capital available in the economy, or the stock of
Policymakers generally use growth in real GDP—the total
physical capital, impacts the economy’s productive
value of economic output adjusted for inflation—to
capacity. For example, giving each member of a
understand changes in economic output over time.
construction crew a set of tools allows them to produce far
Failing
to adjust for inflation would typically result in an
more than if they had to share only one set.
overstatement of the economy’s output as prices rise.
Therefore, real GDP is used to make more accurate
The stock of physical capital in an economy is largely
comparisons of economic growth over time.
dependent on the rate of investment in the economy.
Physical capital depreciates over time as machines break
An alternative measure of economic activity is real GDP
down or become obsolete. Therefore, to maintain a certain
per capita, a country’s real GDP divided by its population.
level of capital stock, there must be sufficient investment in
For comparisons over time or across countries, real GDP
new capital over time to replace any depreciated capital.
per capita is often an improved measure of economic
The higher a country’s investment rate, all else equal, the
growth because it accounts for differences in population.
faster its capital stock will grow.
Figure 2. Real GDP and Real GDP per Capita
Physical capital investment comes at a cost. Resources that
are diverted to investment in physical capital can no longer
be used to purchase present goods or services. Investment
in physical capital leads to greater economic activity in the
future but less consumption of goods in the present. For
more investment information, see CRS In Focus IF11020,
Introduction to the U.S. Economy: Business Investment.
Human Capital
Just as increasing the amount of physical capital available
to workers can help the economy to grow, so can increasing
the amount of human capital. Human capital refers to the
skills, knowledge, and abilities of the workers within the
economy. As workers receive higher levels of education or
Source: U.S. Bureau of Economic Analysis (BEA).
training, they will tend to be more productive. This higher
Note: Data is presented in 2012 dol ars.
level of productivity among workers increases the
productive capacity of the economy and may spur economic
As shown in Figure 2, real GDP at the end of 2019 was
growth. Improvements in the productivity of the labor
roughly 9.5 times as large as it was at the beginning of
supply are generally referred to as investments in human
1947. Real GDP per capita increased by roughly four times
capital.
over the same period. In 2020, due to COVID-19, both real
GDP and real GDP per capita fell in the first half of the
Similar to investments in physical capital, investments in
year and recovered partially in the third quarter of 2020.
human capital also face a tradeoff between current and
GDP levels, however, are still below those pre-pandemic.
future consumption. Consider an individual who is deciding
The second quarter drop in real GDP and third quarter
whether to attend a four-year college or to enter the
increase in real GDP were both the largest single quarter
workforce immediately after high school. If he or she
loss and gain since BEA began collecting this data in 1947.
chooses to attend college, he or she will likely be more
(Note: Jeffrey Stupak, former CRS Analyst in
productive when entering the labor market after college but
Macroeconomic Policy, contributed to this In Focus.)
would forgo all of the consumption he or she could have
financed by working for those four years instead. In
Mark P. Keightley, Specialist in Economics
addition to investments in human capital, increases in the
Lida R. Weinstock, Analyst in Macroeconomic Policy
https://crsreports.congress.gov
Introduction to the U.S. Economy: GDP and Economic Grow th
IF10408
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permissio n of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF10408 · VERSION 43 · UPDATED